Proposal Also Aimed at Cutting Cost of Keeping Ailing Firms Open : Regulator Wants Power to Shut Banks Quickly

A top federal banking regulator said Wednesday that he will propose a rule that would allow him to close troubled banks more quickly.

Robert L. Clarke, U.S. Comptroller of the Currency, said the new rule also is designed to avoid the high cost of keeping insolvent financial institutions operating until buyers can be found. That practice, he said, has proven costly in the savings and loan industry.

The comptroller’s proposal, which would apply only to federally chartered banks, could be adopted in just over a month if no major objections are raised.

He said the rule would immediately affect only a few marginally solvent institutions among the country’s 4,300 federally chartered banks. After climbing to record levels in the mid-1980s, the number of bank closings has leveled off everywhere but in the Southwest. Still, the federal deposit insurance fund for banks lost $4 billion last year.

Clarke unveiled his plan in a speech to nearly 2,000 bankers attending the last session of the Independent Bankers Assn. of America convention at the Anaheim Hilton & Towers.

The proposal, termed the “mercy killing” rule by some bankers, would let Clarke’s office close a bank when it depleted its net worth or basic shareholders’ equity, which is its assets minus liabilities.

Under the proposal, banks would be prohibited from counting as equity funds they have put aside in reserves to cover possible future loan losses.

“We believe that, in conforming our standard more directly with generally accepted accounting principles as our proposal would do, we will acknowledge a bank’s true financial condition and thus be able to close failing national banks which clearly have no prospects for survival,” he said.

An informal study by his office, he said, showed that fewer than 2% of all national banks that had lost their basic equity in the past three years were able to survive without intervention by regulators.

Bankers, learning of the proposal for the first time, voiced some concern that it could hurt the banking business. They claimed that bankers add money to reserve accounts without fear of repercussions because those accounts still are considered part of their capital equity base.

Clarke’s proposal, they said, may discourage bankers from setting up adequate reserves and subject bankers to “overzealous” regulatory examiners.

Clarke agreed that bankers may be loath to increase reserves properly and said examiners would need “some sensitivity” to the matter. But, he said, the industry “would be better served” under the proposal.

Bankers at the three-day meeting devoted much of their time to concerns about the impact of President Bush’s plan to rescue the savings and loan industry with the help of the banking industry.

In a telephone speech from his Washington office, L. William Seidman, chairman of the Federal Deposit Insurance Corp., told the bankers that he wants his agency to retain its independence.

Under the Bush plan, the chairman and vice chairman of a reconstituted FDIC board would serve at the pleasure of the President, and two other members of the five-member board would report to the Treasury, also under the Executive branch.

Independent banks--primarily smaller institutions that constitute 85% of the nation’s 12,000 banks--want some changes in the Bush proposal to ensure FDIC’s independence. They have also urged officials to classify more bank liabilities as deposits so that bigger banks would pay more in deposit insurance premiums.